I’m going to share with you a market secret: Soybeans exhibit a very strong tendency to form a price bottom during the month of October. This bottoming tendency is the result of harvest selling pressure because many farmers sell their crops right out of the field to generate cash. After this harvest selling pressure subsides, during most years the soybean market will exhibit a profitable, tradable post-harvest rally.

I went back to quantify the probabilities for a soybean market post-harvest price rise, and what I discovered was actually quite exciting.

My database goes back to 1968. Below I sorted the data by the percentage gain for the following year’s July soybean futures contract enjoyed from the October low price to the high for each year’s July contract. “Risk” refers to the maximum price break (measured in cents per bushel) for that crop year under the October low price (post-October), with “Gain” equal (in cents per bushel) to the highest price achieved after the October low was registered through the time of the July contract expiration.

Take a look at this data:

July Soybeans By Percentage Gain



Looking at the last column first, note there were only two years with zero gain--meaning the month of October was a high-priced period for the July contract those two years. For 36 of the 38 years, there was at least some price gain off the October lows. However, trading is never as easy as just buying in October and selling at a profit sometime later; we have to be realistic based on some risk/reward criteria.

Realistically, there are six years (1974-75, 1981-82, 1983-84, 1990-91, 2004-05 and 2005-06) where I make the assumption that a trader who knew about this “October market secret” wouldn’t have profited because there was a measurable price drop from the October lows prior to any big gains. (These years are in red.) For example, during the 2004-05 crop year, even though the market eventually gained 30 percent from the October 2004 lows, I placed this year in the losing category because the market was erratic and made a lower low in February 2005. (This was followed by a big rally after that time.)

Still, even if we include years like 2004-05 in the red category, you stood a decent chance to make a nice profit with minimal risk by buying in October in 32 of the 38 years--more than 80 percent of the time. That’s pretty decent odds.

It becomes a little more interesting if we analyze the six “red” years. The average October low price for the past 38 years is $5.70, but this number is likely skewed to the cheap side by five years in the late 1960s/early ’70s--a time when soybeans traded below $4 per bushel (a price I doubt we’ll ever see again; after all, a gallon of gasoline then cost less than 75 cents).

If you pull these years out, since 1973 the average October low price is approximately $6.10. However, in three of those six red years, the market price was very high during the October harvest period. During only two years in the past 38 has this tendency not worked if the price of July soybeans (in October) was below $6 per bushel. In other words, if the soybeans are relatively low-priced in October, the odds for a decent post-harvest rally rise significantly.

Here’s another way to look at this data: During the past 38 years, when the price of July soybeans in October was below $6 per bushel, there was a reasonable assumption a trader could've made a nice profit nearly 95 percent of the time. This year, though at this time we have no way of knowing what the October low for the July contract will be, odds appear good that it will be below $6 per bushel, or at least not much above. Last week, July soybeans were trading on either side of $6.

Based on the tendency described above, the reward-to-risk ratio appears to favor establishing a long position in the soybean market some time this month.

I’ll be looking for a technical sign of a bottom to flash a buy signal for Futures Market Forecaster subscribers.

George Kleinman is editor of Commodities Trends.

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Futures and futures options can entail a high degree of risk and are not appropriate for all investors. Commodities Trends is strictly the opinion of its writer. Use it as a valuable tool, not the "Holy Grail." Any actions taken by readers are for their own account and risk. Information is obtained from sources believed reliable, but is in no way guaranteed. The author may have positions in the markets mentioned including at times positions contrary to the advice quoted herein. Opinions, market data and recommendations are subject to change at any time. Past Results Are Not Necessarily Indicative of Future Results.

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Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown. In fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk in actual trading. For example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all of which can adversely affect actual trading results.